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Is Alcatel On Hold?

May 09, 1993

Information Processing

IS ALCATEL ON HOLD?

If anyone understood how to crack Europe's common market, it was Alcatel Chairman Pierre Suard. The French telecommunications mogul broke into Europe's clubby national phone markets with a string of coups, starting with the 1987 purchase of ITT Corp.'s $6 billion equipment business. Suddenly, Alcatel looked like a local champion in almost every major country--and locked up 30% of the European market for phone switch and transmission gear. Profits at parent Alcatel Alsthom soared, reaching $1.3 billion last year.

Now, Alcatel's run of fast growth in Europe may be over, and Suard is looking for greener pastures. Spending by Europe's national phone monopolies--especially in Alcatel's main French and German markets--is slowing dramatically. Worse, prices are cratering under pressure from new competitors trying to break into Europe's newly deregulated markets. Much of Alcatel Alsthom's 14% profit increase last year came from lower taxes and cost cuts, as sales leveled out at $30 billion. Says James Capel & Co. analyst Bill Coleman: "France's premier growth company has no growth."

So while Suard conducts damage control at home, he's campaigning hard to grab market share in such booming regions as Asia and Latin America. At best, it will take a couple of years for the strategy to offset the slowdown in Europe. Sure, telephone-line growth in those developing areas should double in the next eight years. But margins in those markets are modest compared with Europe's, and Alcatel is facing fiercer competition overseas, too. "The transition phase could be fairly bloody," says one analyst. For a company accustomed to 30% average gains in annual profits, "bloody" means that profits this year will be flat at best.

Suard has won entry to such sizzling markets as Eastern Europe, China, India, and Mexico by promising to transfer vital technology and jobs to local manufacturing joint ventures. Last year alone, Alcatel opened new ventures in six countries, including Malaysia, Pakistan, and Vietnam.

But Mexico, Alcatel's biggest Latin American market, shows how tough it can be to hang in there. In 1990, the new owners of privatized Telefonos de Mexico began playing Alcatel off against AT&T, Siemens, L. M. Ericsson, and Northern Telecom. Orders finally started flowing again late last year--but at prices cut by 40% or more from the original contracts.

FANCY FOOTWORK. Suard has a special card to play overseas. It's his network of subsidiaries spread across Europe. Operating under different flags can come in handy when dealing with the inevitable political and financial obstacles throughout the Third World.

Take China. Last year, when Beijing threatened France with retaliation for the sale of Mirage jets to Taiwan, Alcatel could have been frozen out of China's spectacular growth--despite a six-year-old joint venture in Shanghai that enjoys a market share of 50%. Alcatel appears to have steered around the problem by passing the sales through its subsidiary in Spain, which has warm relations with Beijing. In early April, the company won a $500 million order for 4 million new lines. "We've proved we know how to adapt to changing environments and seize opportunities," Suard says.

More fancy footwork will be needed if Alcatal hopes to defend its position in Europe. Suard must continue restructuring to cut costs. It's also time to start showing the payoff from investments in digital mobile-phone networks where Alcatel is playing catch-up to market leader Ericsson. But the biggest threat to Alcatel is largely out of its control: the European invasion of American Telephone & Telegraph Co. and Canada's Northern Telecom Ltd. And it will likely intensify in the wake of U.S. and European Community talks to open public-equipment markets.

That has Suard contemplating a bold step: Within the next year or two, he could break the long-held taboo against suppliers investing in carriers. Now, he may be forced to protect Alcatel's customer base from buy-ins by his North American rivals. Northern Tel's parent, BCE Inc., bought a stake in Britain's No. 2 carrier, Mercury Communications Ltd., last January. "The big danger is that we could get locked out of our key customers," fears Alcatel Executive Vice-President Jozef Cornu. If the trend continues, Suard will have to revise his game plan--tout de suite.Jonathan B. Levine in Paris, with bureau reports